Bankruptcy: a welcome relief for countless debtors in America. But it may not cover every type of debt you have. Alimony, child support, student loans, and certain tax debt are often untouchable, even by a highly successful bankruptcy.
If you owe the Internal Revenue Service (IRS) more than you can pay, however, you still have options. Some debtors qualify for an offer in compromise (OIC), which is an agreement with the IRS to pay less than what they owe. According to data from 2017, the IRS accepted roughly 40% of OICs.
In fact, some debtors successfully discharge thousands of dollars. According to Professor Erin H. Stearns at the University of Denver’s Sturm College of Law, the IRS has been known to accept a $10 OIC to cover $100,000 in back taxes. You may be more likely to see this level of success if you meet the federal low-income guidelines, your tax debt is causing you to seriously consider bankruptcy, you are in legal trouble with the IRS, or you are retired and you have a fixed income.
Here are 8 things to know about applying for an OIC:
- The IRS will automatically reject your OIC if you haven’t filed all your tax returns and you haven’t made any estimated payments.
- You aren’t eligible for an OIC if you are in an open bankruptcy.
- You will likely not qualify if the IRS believes you could reasonably make payments through an installment agreement.
- You will need to include Form 656 AND either Form 433-A if you are an individual or 433-B if you are a business.
- Unless you meet the Low-Income Certification requirements, you will need to include a $186 application fee and an initial tax payment. The IRS will apply both the payment and the fee to your tax debt whether or not your OIC is approved.
- To determine whether you qualify, the IRS will consider your income, your ability to pay, the total worth of your assets, and your other expenses.
- Generally, the IRS will accept your offer if the agency believes it cannot reasonably expect a higher amount from you. Therefore, your debt must be greater than your assets and income, or you would experience undue financial hardship if you paid the debt in full.
- If the IRS fails to decide within 2 years of receiving your OIC, it is automatically accepted.
While you wait for a decision from the IRS, the agency may file a Notice of Federal Tax Lien, but it will suspend all other collection actions. Additionally, you will not need to make payments toward your current installment agreement.
If the IRS accepts your OIC, you will need to meet all the terms of your agreement, and the IRS will not release federal tax liens until you fulfill these terms. If the IRS owes you a tax refund during the same year it approved your OIC, it will automatically apply the refund to your tax debt.
If the IRS rejects your OIC, you can appeal within 30 days. You can also resubmit a larger offer.
Are You Considering an OIC? Put Our Experience to Work.
At The Buchalter Law Group, our legal team has 45+ years of collective experience. We are deeply committed to developing powerful solutions to our clients’ overwhelming debt, and we are ready to take on your case next. Whether we help you submit an OIC, create a reasonable installment agreement, or file bankruptcy, you can trust our seasoned attorneys to handle your case with the utmost care and urgency.